UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended July 31, 2000 or _____________
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____________ to
_____________
Commission File Number: 0-15827
SHARPER IMAGE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-2493558
(State of Incorporation) (I.R.S. Employer Identification No.)
650 Davis Street, San Francisco, California 94111
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 445-6000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Common Stock, $0.01 par value 12,059,294 shares as of September 11, 2000
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED BALANCE SHEETS
<CAPTION>
July 31, January 31, July 31,
2000 2000 1999
Dollars in thousands, except per share amounts (Unaudited) (Note A) (Unaudited)
----------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 36,149 $ 55,457 $ 25,894
Accounts receivable, net of allowance for doubtful
accounts of $665, $ 834 and $ 1,008 6,538 7,882 5,737
Merchandise inventories 52,933 39,652 34,844
Deferred catalog costs 4,186 3,079 2,482
Prepaid expenses and other 6,218 7,494 6,782
---------- ---------- ----------
Total Current Assets 106,024 113,564 75,739
Property and equipment, net 28,347 23,961 23,021
Deferred taxes and other assets 4,957 4,594 4,063
---------- ---------- ----------
Total Assets $ 139,328 $ 142,119 $ 102,823
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 44,089 $ 42,974 $ 24,500
Deferred revenue 10,067 8,605 6,996
Income taxes payable 488 7,194 -
Current portion of notes payable 153 147 308
---------- ---------- ----------
Total Current Liabilities 54,797 58,920 31,804
Notes payable 2,288 2,366 2,441
Other liabilities 3,704 3,710 3,241
---------- ---------- ----------
Total Liabilities 60,789 64,996 37,486
---------- ---------- ----------
Commitments and contingencies - - -
Stockholders' Equity:
Preferred stock, $0.01 par value:
Authorized 3,000,000 shares: Issued and outstanding, none - - -
Common stock, $0.01 par value:
Authorized 25,000,000 shares: Issued and outstanding,
12,042,727, 12,016,827 and 11,965,730 shares 120 120 119
Additional paid-in capital 43,834 43,707 43,060
Retained earnings 34,585 33,296 22,158
---------- ---------- -----------
Total Stockholders' Equity 78,539 77,123 65,337
---------- ---------- -----------
Total Liabilities and Stockholders' Equity $ 139,328 $ 142,119 $ 102,823
========== ========== ===========
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
Dollars in thousands, except per share amounts July 31, July 31,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Sales $ 88,964 $ 64,463 $ 155,645 $ 110,084
Less: returns and allowances 9,454 7,028 17,369 12,165
----------- ----------- ----------- -----------
Net Sales 79,510 57,435 138,276 97,919
Other revenue 360 269 719 644
----------- ----------- ----------- -----------
79,870 57,704 138,995 98,563
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Cost of products 38,180 28,355 66,957 48,635
Buying and occupancy 7,249 6,887 14,169 13,635
Advertising and promotion 12,556 8,193 19,898 12,427
General, selling, and administrative 20,301 14,332 36,875 26,745
----------- ----------- ----------- -----------
78,286 57,767 137,899 101,442
----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) 1,584 (63) 1,096 (2,879)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income (expense) - net 592 (101) 1,250 (142)
Other - net (203) (6) (198) (1)
----------- ----------- ----------- -----------
389 (107) 1,052 (143)
----------- ----------- ----------- -----------
Income (Loss) Before Income Tax
Expense (Benefit) 1,973 (170) 2,148 (3,022)
Income Tax Expense (Benefit) 789 (68) 859 (1,209)
----------- ----------- ----------- -----------
Net Income (Loss) $ 1,184 $ (102) $ 1,289 $ (1,813)
=========== =========== =========== ===========
Net Income (Loss) Per Share
- Basic $ 0.10 $ (0.01) $ 0.11 $ (0.20)
=========== =========== =========== ===========
- Diluted $ 0.09 $ (0.01) $ 0.10 $ (0.20)
=========== =========== =========== ===========
Weighted Average Number of Shares -
Basic 12,035,104 9,095,492 12,029,792 9,021,330
Diluted 13,055,221 9,095,492 12,928,369 9,021,330
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
SHARPER IMAGE CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
July 31,
--------
Dollars in thousands 2000 1999
---- ----
<S> <C> <C>
Cash Provided by (Used for) Operating Activities:
Net Income (Loss) $ 1,289 $ (1,813)
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operations:
Depreciation and amortization 3,404 3,093
Deferred rent expense 87 73
Deferred income taxes - (1,308)
Loss on disposal of equipment 211 -
Changes in operating assets and liabilities:
Merchandise inventories (13,281) (2,246)
Accounts receivable 1,344 1,050
Deferred catalog costs, prepaid expenses and other assets (194) (261)
Accounts payable and accrued expenses 1,115 (4,113)
Deferred revenue, income taxes payable and other liabilities (5,337) (3,471)
----------- ----------
Cash Used for Operating Activities (11,362) (8,996)
----------- ----------
Cash Used for Investing Activities:
Property and equipment expenditures (8,001) (3,601)
------------ -----------
Cash Used for Investing Activities (8,001) (3,601)
----------- ----------
Cash Provided by (Used for) Financing Activities:
Proceeds from revolving borrowings - 11,955
Payments on revolving borrowings - (11,955)
Proceeds from issuance of common stock, net of repurchases 127 30,501
Principal payments on notes payable (72) (399)
----------- ----------
Cash Provided by Financing Activities 55 30,102
----------- ----------
Net Increase (Decrease) in Cash and Equivalents (19,308) 17,505
----------- ----------
Cash and Equivalents at Beginning of Period 55,457 8,389
----------- ----------
Cash and Equivalents at End of Period $ 36,149 $ 25,894
=========== ==========
Supplemental Disclosure of Cash Paid for:
Interest $135 $205
Income Taxes $7,193 $0
<FN>
See notes to condensed financial statements.
</FN>
</TABLE>
4
<PAGE>
SHARPER IMAGE CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three-month and six-month periods ended July 31, 2000 and 1999
(Unaudited)
NOTE A- Financial Statements
The condensed balance sheets at July 31, 2000 and 1999, and the related
condensed statements of operations for the three-month and six-month periods,
and condensed statements of cash flows for the six-month period then ended have
been prepared by the Sharper Image Corporation ("the Company"), without audit.
In the opinion of management, the condensed financial statements include all
adjustments (which include only normal recurring adjustments) necessary to
present fairly the financial position, results of operations and cash flows at
July 31, 2000 and 1999, and for all periods then ended. The balance sheet at
January 31, 2000, presented herein, has been derived from the audited balance
sheet of the Company.
Certain information and disclosures normally included in the notes to the annual
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted from these interim
financial statements. Accordingly, these interim condensed financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's 1999 Annual Report.
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. A secondary peak period for the Company is June,
reflecting the gift giving for Father's Day and graduations. A substantial
portion of the Company's total revenues and all or most of the Company's net
earnings, usually occur in the fourth quarter ending January 31. The Company, as
is typical in the retail industry, generally experiences lower revenues and net
operating results during the other quarters and has incurred and may continue to
incur losses in these quarters. The results of operations for these interim
periods are not necessarily indicative of the results for the full fiscal year.
Certain reclassifications have been made to prior periods' financial statements
in order to conform with current period presentations.
NOTE B- Revolving Loan and Notes Payable
During the six-months ended July 31, 2000, the Company amended its revolving
secured credit facility agreement. This amended agreement extends the expiration
date to September 2004. The agreement as amended, allows the Company borrowings
and letters of credit up to a maximum of $31 million for the period from July
18, 2000 through December 31, 2000, and $20 million for other times of the year
based on inventory levels. The credit facility is secured by the Company's
inventory, accounts receivable, general intangibles and certain other assets.
Borrowings under this facility bear interest at either the prime rate per annum
or at LIBOR plus 1.50% per annum, determined by financial performance. The
credit facility contains certain financial covenants pertaining to interest
coverage ratio and net worth and contains limitations on operating leases, other
borrowings, dividend payments and stock repurchases. For the six-month period
ended July 31, 2000, the Company was in compliance with all covenants.The credit
facility allows seasonal borrowings of up to $31 million for the period from
5
<PAGE>
July 18, 2000 through December 31, 2000, increasing by $1 million for the period
October 1 through December 31, in each of the two subsequent years, and
remaining at the $33 million for this period the following year. At July 31,
2000, the Company had no amounts outstanding on its revolving credit facility.
As of July 31, 2000, letter of credit commitments outstanding under the credit
facility were $18.0 million.
At July 31, 2000, notes payable included a mortgage loan collateralized by the
Company's distribution center. This note bears interest at a fixed rate of
8.40%, provides for monthly payments of principal and interest in the amount of
$29,367, and matures in January 2011. At July 31, 2000, the balance of this note
was $2.4 million.
NOTE C - Earnings (Loss) Per Share
Basic earnings per share is computed as net income available to common
stockholders divided by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution that
could occur from common shares to be issued through stock options. The potential
dilutive effects of stock options were excluded from the diluted earnings per
share for the three and six-month periods ended July 31, 1999 because their
inclusion in net loss periods would be anti-dilutive to the earnings per share
calculation. For the three and six-months ended July 31, 2000, the weighted
average number of common shares outstanding was adjusted for the incremental
shares assumed issued on the exercise of stock options:
Three months Six months
ended ended
July 31, 2000 July 31, 2000
------------- -------------
Net income $1,184,000 $1,289,000
Average shares of common stock
outstanding during the period 12,035,104 12,029,792
========== ==========
Basic Earnings per Share $ 0.10 $ 0.11
========== ==========
Average shares of common stock
outstanding during the period 12,035,104 12,029,792
Add:
Incremental shares from assumed
exercise of stock options - diluted 1,020,117 898,577
---------- ----------
13,055,221 12,928,369
========== ==========
Diluted Earnings per Share $ 0.09 $ 0.10
========== ==========
6
<PAGE>
Options for which the exercise price was greater than the average market price
of common stock for the three and six-months ended July 31, 2000 were not
included in the computation of diluted earnings per share. The number of such
options for which the exercise price was greater than the average market price
of $13.61 was 12,500.
NOTE D - Commitments and Contingencies
The Company is party to various legal proceedings arising from normal business
activities. Management believes, after review with corporate counsel, that the
resolution of these matters will not have a material effect on the Company's
financial position or results of operations.
NOTE E - New Accounting Standards
In June 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No.
137, "Accounting for Derivative Instruments-Deferral of the Effective Date of
SFAS No. 133." SFAS 133, as amended in July 2000 by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133", establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. The statement requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. As
amended by SFAS 137, SFAS 133 is effective for fiscal years beginning after June
15, 2000 and is not to be applied retroactively. The Company is evaluating the
impact, if any, SFAS No. 133 may have on the Company's financial position or
results of operations.
NOTE F - Segment Information
The Company classifies its business interests into three reportable segments:
retail stores, catalog and Internet. The accounting policies of the segments are
the same as those described in the summary of significant accounting policies in
Note A of the 1999 Annual Report. The Company evaluates performance and
allocates resources based on operating contribution, which excludes unallocated
corporate general and administrative costs and income tax expense or benefit.
The Company's reportable segments are strategic business units that offer the
same products and utilize common merchandising, distribution, and marketing
functions, as well as common information systems and corporate administration.
The Company does not have intersegment sales, but the segments are managed
separately because each segment is a different channel for selling products.
7
<PAGE>
<TABLE>
Financial information for the Company's business segments is as follows:
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Dollars in thousands
Revenues:
Stores $ 53,317 $ 39,828 $ 91,507 $ 69,068
Catalog 14,487 12,449 25,597 20,822
Internet 10,634 4,258 19,040 6,587
Other 1,432 1,169 2,851 2,086
----------- ---------- ---------- ----------
Total Revenues $79,870 $ 57,704 $ 138,995 $ 98,563
----------- ---------- ---------- ----------
Operating Contributions:
Stores $ 6,962 $ 4,578 $ 10,432 $ 5,292
Catalog 1,513 487 3,011 1,357
Internet 554 196 951 747
Unallocated (7,056) (5,431) (12,246) (10,418)
----------- ---------- ---------- ----------
Income (Loss) Before
Income Tax Benefit $ 1,973 $ (170) $ 2,148 $ (3,022)
----------- ---------- ---------- ----------
</TABLE>
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The condensed balance sheets of the Company as of July 31, 2000 and 1999, and
the related condensed statements of operations for the three-month and six-month
periods, and statement of condensed cash flows for the six-month periods then
ended have been reviewed by the Company's independent accountants, Deloitte &
Touche LLP, whose report covering their review of the financial statements is
presented herein.
8
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
Sharper Image Corporation
San Francisco, California
We have reviewed the accompanying condensed balance sheets of Sharper Image
Corporation as of July 31, 2000 and 1999, and the related condensed statements
of operations for the three-month and six-month periods, and condensed
statements of cash flows for the six-month periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the balance sheet of Sharper Image
Corporation as of January 31, 2000, and the related statements of operations,
stockholders' equity and cash flows for the year then ended (not presented
herein); and in our report dated March 24, 2000, we expressed an unqualified
opinion on those financial statements. In our opinion, the information set forth
in the accompanying condensed balance sheet as of January 31, 2000 is fairly
stated, in all material respects, in relation to the balance sheet from which it
has been derived.
/s/ Deloitte & Touche LLP
-------------------------
San Francisco, CA
August 16, 2000
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
The following table is derived from the Company's Statements of Operations and
shows the results of operations for the periods indicated as a percentage of
total revenues.
<CAPTION>
Three Months Ended Six Months Ended
July 31, July 31,
-------- ---------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net store sales 66.8% 69.0% 65.9% 70.1%
Net catalog sales 18.1 21.6 18.4 21.1
Net Internet sales 13.3 7.4 13.7 6.7
Net wholesale sales 1.3 1.5 1.5 1.5
Other revenue 0.5 0.5 0.5 0.6
---------- ---------- ---------- ----------
Total Revenues 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of products 47.8 49.1 48.2 49.3
Buying and occupancy 9.1 11.9 10.2 13.8
Advertising and promotion 15.7 14.2 14.3 12.6
General, selling
and administrative 25.4 24.9 26.6 27.1
Other (Income) Expense (0.5) 0.2 (0.8) 0.2
---------- ---------- ---------- ----------
Income (Loss) Before Income Tax
Expense (Benefit) 2.5 (0.3) 1.5 (3.0)
Income Tax Expense (Benefit) 1.0 (0.1) 0.6 (1.2)
---------- ---------- ---------- ----------
Net Income (Loss) 1.5% (0.2)% .9% (1.8)%
========== ========== ========== ==========
</TABLE>
10
<PAGE>
The following table sets forth the components of total revenues for the periods
indicated.
Three Months Ended Six Months Ended
July 31, July 31,
-------- --------
2000 1999 2000 999
---- ---- ---- ----
Revenues (dollars in thousands)
Net store sales $53,317 $39,828 $ 91,507 $69,068
Net catalog sales 14,487 12,449 25,597 20,822
Net Internet sales 10,634 4,258 19,040 6,587
Net wholesale sales 1,072 900 2,132 1,442
------- ------- -------- -------
Total Net Sales 79,510 57,435 138,276 97,919
List rental 297 220 596 502
Licensing 63 49 123 142
------- ------- -------- -------
Total Revenues $79,870 $57,704 $138,995 $98,563
======= ======= ======== =======
Revenues
The Company's second quarter net sales increased $22,075,000, or 38.4%, from the
comparable three-month period last year. Net sales for the six-month period
ended July 31, 2000 increased $40,357,000 or 41.2%, from the comparable period
last year. Returns and allowance for the three-month and six-month periods ended
July 31, 2000, were 10.6% and 11.2% of sales, as compared with 10.9% and 11.1%
of sales for the comparable prior year periods. The increase in Company net
sales for the three and six-month periods ended July 31, 2000 compared to the
same periods last year was attributable to increases in net sales from Sharper
Image stores of $13,489,000 and $22,439,000, respectively; increases in net
sales from the Sharper Image catalog of $2,038,000 and $4,775,000, respectively;
and increases in net sales from Internet operations of $6,376,000 and
$12,453,000, respectively.
The continued popularity of Sharper Image Design proprietary products, as well
as private label products, has been a key factor in the year over year increases
in net sales. Management believes that the continuing development and
introduction of these new and popular products is important to the Company's
future success. Sharper Image Design proprietary products and private label
products increased from 43.2% of net sales in 1999 to 64.7% for the comparable
three month period ended July 31, 2000. Also, the Company introduced in 1999 a
private label product, the Razor Rollerboard scooters, which have contributed
substantially to the net sales increases in 2000. Management believes that the
popularity of this product will continue through the 2000 holiday season. On a
forward-looking basis, there can be no assurance that the sales of this product
can be maintained at current levels or that sales from this product will
continue at its present trend. Management believes the effectiveness of its
increased multimedia advertising initiatives in fiscal 1999 and the first two
quarters of 2000 was also a contributing factor in higher revenue increases.
Management believes the multimedia advertising initiatives will be an important
factor in future revenue growth, although there can be no assurances of the
continued success of these and future advertising initiatives. Management also
believes this advertising strategy contributed to improved sales in all three
sales channels: stores, catalog and Internet. Sales in the Internet channel also
benefited from the popularity of online shopping and continued enhancements to
the Company's e-commerce site sharperimage.com.
11
<PAGE>
For the three-month and six-month periods ended July 31, 2000, as compared with
the same periods last year, net store sales increased $13,489,000, or 33.8%, and
$22,439,000, or 32.5 %, and comparable store sales increased by 32.8% and 31.4%,
respectively. The increase in net store sales for the three-month period ended
July 31, 2000 reflects a 22.4% increase in total store transactions, with a 9.7%
increase in average revenue per transaction, compared with the same prior year
period. Total store transactions increased 18.9% for the six-months ended July
31, 2000, with an 11.8% increase in average revenue per transaction, compared
with the same prior year period. Management believes the increase in net store
sales is partially due to the increase in multimedia advertising programs during
the three and six-month period ended July 31, 2000. Also contributing to the
comparable store sales growth is the continued popularity of Sharper Image
Design products and private label products, including the Razor Rollerboard
scooters.
For the three and six-month periods ended July 31, 2000, as compared with the
same period of the prior year, net catalog segment sales increased $2,038,000 or
16.4%, and $4,775,000 or 22.9%, respectively. For the three-month period ended
July 31, 2000, the increase in net catalog sales represents a 13.2% increase in
the number of transactions and a 2.8% increase in the average revenue per order
for the three-month period ended July 31, 2000. For the six-month period ended
July 31, 2000, the increase in net catalog sales represents a 16.7% increase in
the number of transactions and a 7.4% increase in the average revenue per order.
In addition to the continued popularity of Sharper Image Design proprietary and
private label products, management believes the increase in Sharper Image
catalog sales for the three and six-month periods ended July 31, 2000, as
compared to the same period last year, is partially attributable to a 31.9% and
29.0% increase in circulation, or 44.3% and 45.3% increase in Sharper Image
catalog pages circulated. Management is continually reviewing the pages and the
number of catalogs circulated in its efforts to optimize the revenues from
catalog advertising, and is currently planning to continue an increased
circulation in fiscal 2000. Another contributing factor to the increase in net
catalog sales in fiscal 2000 from the same period last year, is the increased
single-product "solo-mailer" campaigns of Sharper Image Design proprietary
products conducted in fiscal 2000, and increased revenue generated from
infomercials and print ads in 2000. The Company intends to continue its
aggressive multimedia advertising programs through the fourth quarter to attract
new customers, while achieving an appropriate return on investment.
For the three and six-month periods ended July 31, 2000, the Company's Internet
sales from the sharperimage.com website, which includes the Sharper Image
auction site, increased $6,376,000, or 150% and $12,453,000 or 189%,
respectively, from the same periods last year. The three-month increase is
attributable to a 141.7% increase in Internet transactions and an increase of
3.3% in average revenue per transaction, as compared to the same period of the
prior year. The six-month increase is attributable to a 181.2% increase in
Internet transactions and an increase of 2.8% in average revenue per
transaction, as compared to the same period of the prior year. The Sharper Image
auction site was launched in April 1999, to further the Company's strategy of
increasing its Internet business and broadening its customer base. Management
believes the auction site has brought on additional customers as it has
increased the total visits and page views on the Company's website. The auction
site offers consumers the fun of bidding and winning products at less than
retail prices, it also allows the Company the opportunity to effectively manage
its closeout, refurbished and repackaged products. Management reviews the
Companies website on a regular basis and is continually developing new and
enhanced features.
12
<PAGE>
Cost of Products
Cost of products for the three-month and six-month periods ended July 31, 2000
increased $9,825,000, or 34.7%, and $18,322,000, or 37.7%, from the comparable
prior year periods. The increase in cost of products is due to the higher sales
volume compared to the same periods last year. The gross margin rate for the
three and six-month periods ended July 31, 2000 was 52.0% and 51.6%,
respectively, which was 1.4 and 1.3 percentage points better than the comparable
prior year periods. The higher gross margin rates reflect an increase in sales
of the Sharper Image Design proprietary and private label products, which
generally carry higher margins. The Sharper Image Design proprietary products
and private label products percentage of sales, exclusive of wholesale,
increased to 64.7% from 43.2% in first six months of fiscal 2000 compared to the
same period of fiscal 1999.
The Company's gross margin rate fluctuates with the changes in its merchandise
mix, which is affected by new items available in various categories. The
variation in merchandise mix from category to category from year to year
reflects the characteristic that the Company is driven by individual products,
as opposed to general lines of merchandise. Additionally, the Company's
expanding auction site and other promotional activities will, in part, tend to
offset the rate of increase in our gross margin performance. It is impossible to
predict future gross margin rates, although the Company's goal is to continue to
increase sales of Sharper Image Design proprietary products and other exclusive
private label products, as these products generally carry higher margins than
branded products and may be less susceptible to price comparisons by customers.
The popularity of the Sharper Image proprietary and private label products
contributed to the 1.3 percentage point increase in the gross margin rate for
fiscal 2000, and management believes these products will continue to have a
positive impact on the Company's gross margin rate.
Buying and Occupancy
Buying and occupancy costs for the three-month and six-month periods ended July
31, 2000 increased $362,000, or 5.3%, and $534,000, or 3.9% from the comparable
prior year periods. The increase primarily reflects the occupancy costs
associated with the five new stores opened since July 31, 1999, which was
partially offset by the elimination of the occupancy costs of the four Sharper
Image stores closed at their lease maturity during the fiscal 1999 and the first
six months of fiscal 2000. Buying and occupancy costs as a percentage of net
sales decreased from 12.0% for the three months ended July 31, 1999 to 9.1% for
the three months ended July 31, 2000. Buying and occupancy costs as a percentage
of net sales decreased from 13.9% for the six months ended July 31, 1999 to
10.2% for the six months ended July 31, 2000. Although "percentage rent" terms
in most of the Company's lease agreements will increase lease costs in the
second half of 2000, management believes the Company will continue to experience
buying and occupancy leverage as a percentage of sales when compared to the same
period of 1999.
Advertising and Promotion Expenses
Advertising and promotion expenses for the three-month and six-month periods
ended July 31, 2000 increased $4,363,000, or 53.3%, and $7,471,000, or 60.1%
from the comparable prior year periods. The increase in advertising and
promotion expenses was partially attributable to the 45.3% increase in The
Sharper Image catalog pages circulated in the first six months of fiscal 2000.
The Company continued its multimedia advertising initiatives to acquire new
customers which management believes will increase sales in the stores, catalog
and Internet channels, although there can be no assurance of the continued
success of these advertising initiatives. These advertising campaigns include
radio advertising, single product "solo-mailers", print advertising and
infomercials, among others. Advertising and promotion expenses as a percentage
of net sales increased from 14.3% for the quarter
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ended July 31, 1999 to 15.8% for the quarter ended July 31, 2000. Advertising
and promotion expenses as a percentage of net sales increased from 12.7% for the
six months ended July 31, 1999 to 14.4% for the six months ended July 31, 2000.
While the Sharper Image catalog serves as the primary source of advertising for
its retail stores, mail order and Internet businesses, the Company continually
reevaluates its advertising strategies and catalog circulation plans to maximize
the overall effectiveness of its advertising programs.
General, Selling and Administrative Expenses
General, selling and administrative (GS&A) expenses for the three-month and
six-month periods ended July 31, 2000 increased $5,969,000, or 41.7%, and
$10,130,000, or 37.9% from the comparable prior year periods. The increase was
primarily due to increases in variable expenses from increased net sales. The
Company's continued development in proprietary products and Internet operations
have increased GS&A expenses for expanding and improving the operational
infrastructure, as well as attracting and retaining key employees. The Company
also added to its administrative infrastructure by adding payroll, facilities
and related costs in the areas of internet site development, distribution
centers, proprietary product development and corporate office, among other
departments. GS&A expenses as a percentage of net sales increased from 24.9% for
the quarter ended July 31, 1999 to 25.5% for the quarter ended July 31, 2000.
GS&A expenses as a percentage of net sales decreased from 27.3% for the six
months ended July 31, 1999 to 26.7% for the six months ended July 31, 2000.
Other Income (Expense)
Other income, net, for the three and six-month periods ended July 31, 2000,
increased $496,000 and $1,195,000 from the comparable prior year periods,
primarily due to the interest income earned in fiscal 2000 from higher
investment balances generated from improved operating results and the proceeds
of the secondary offering completed in July 1999.
Liquidity and Capital Resources
The Company met its short-term liquidity needs and its capital requirements in
the six-month period ended July 31, 2000 with cash generated by operations,
trade credit and funds retained from the secondary offering proceeds.
During the six months ended July 31, 2000, the Company amended its revolving
secured credit facility agreement. This amended agreement extends the expiration
date to September 2004. The agreement allows the Company borrowings and letters
of credit up to a maximum of $31 million for the period from July 18, 2000
through December 31, 2000, and $20 million for other times of the year based on
inventory levels. The credit facility is secured by the Company's inventory,
accounts receivable, general intangibles and certain other assets. Borrowings
under this facility bear interest at either the prime rate per annum or at LIBOR
plus 1.50% per annum, determined by financial performance. The credit facility
contains certain financial covenants pertaining to interest coverage ratio and
net worth and contains limitations on operating leases, other borrowings,
dividend payments and stock repurchases. For the six-month period ended July 31,
2000, the Company was in compliance with all covenants. The credit facility
allows seasonal borrowings of up to $31 million for the period from July 18,
2000 through December 31, 2000, increasing by $1 million for the period October
1 through December 31, in each of the two subsequent years, and remaining at the
$33 million for this period the following year. At July 31, 2000, the Company
had no amounts outstanding on its revolving credit facility. As of July 31,
2000, letter of credit commitments outstanding under the credit facility were
$18.0 million.
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At July 31, 2000, notes payable included a mortgage loan collateralized by the
Company's distribution center. This note bears interest at a fixed rate of
8.40%, provides for monthly payments of principal and interest in the amount of
$29,367, and matures in January 2011. At July 31, 2000, the balance of this note
was $2.4 million.
During the six-month period ended July 31, 2000, the Company opened a new store
located at Horton Plaza in San Diego, California and a flagship location at
Union Square in San Francisco, California. The Company has also remodeled six
stores during the first six months of fiscal 2000 and opened a second primary
distribution center totaling approximately 60,000 square feet in Ontario,
California. This facility will be operated for the Company by a third party
vendor. In the remaining quarters of fiscal 2000, the Company plans include
opening three to five new stores. These initiatives, combined with updating the
Company's e-commerce Web site sharperimage.com and a recurring level of capital
expenditures, will result in capital expenditures estimated to be between $12
million and $20 million in fiscal 2000.
The Company believes it will be able to fund its cash needs for the remainder of
fiscal 2000 through existing cash balances, cash generated from operations,
trade credit and the credit facility.
Seasonality
The Company's business is highly seasonal, reflecting the general pattern
associated with the retail industry of peak sales and earnings during the
Holiday shopping season. A secondary peak period for the Company is June,
reflecting the gift giving for Father's Day and graduations. A substantial
portion of the Company's total revenues and all or most of the Company's net
earnings occur in the fourth quarter ending January 31. The Company, as is
typical in the retail industry, generally experiences lower revenues and
earnings during the other quarters and has incurred and may continue to incur
losses in these quarters. The results of operations for these interim periods
are not necessarily indicative of the results for the full fiscal year.
Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risks, which include changes in interest rates
and, to a lesser extent, foreign exchange rates. The Company does not engage in
financial transactions for trading or speculative purposes.
The interest payable on the Company's credit facility is based on variable
interest rates and therefore affected by changes in market interest rates. If
interest rates on existing variable debt rose 0.9% (10% from the bank's
reference rate) during the period ending- July 31, 2000, the Company's results
from operations and cash flows would not be materially affected. In addition,
the Company has fixed and variable income investments consisting of cash
equivalents and short-term investments, which are also affected by changes in
market interest rates. The Company does not use derivative financial instruments
in its investment portfolio.
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The Company enters into a significant amount of purchase obligations outside of
the U.S. that are settled in U. S. dollars, and therefore, has only minimal
exposure to foreign currency exchange risks. The Company does not hedge against
foreign currency risks and believes that foreign currency exchange risk is
immaterial.
Uncertainties and Risk
The foregoing discussion and analysis should be read in conjunction with the
Company's financial statements and notes thereto included with this report. The
foregoing discussion contains certain forward-looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those set forth in such forward-looking statements. Such
risks and uncertainties include, without limitation, risks of changing market
conditions in the overall economy and the retail industry, consumer demand, the
opening of new stores, actual advertising expenditures by the Company, the
success of the Company's advertising and merchandising strategy, availability of
products, and other factors detailed from time to time in the Company's annual
and other reports filed with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements. The
Company undertakes no obligations to revise to these forward-looking statements
to reflect events or circumstances after the date hereof.
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PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company's 2000 Annual Meeting of Stockholders (the Annual
Meeting) was held on June 12, 2000. The following matters were voted
on by the stockholders:
1. Election of five Directors. Messrs. Richard J. Thalheimer,
Alan Thalheimer, Gerald Napier, Morton David, and George James were
elected to the Company's Board of Directors. The results of the
voting were as follows: 11,186,921 votes in favor of Richard J.
Thalheimer, with 388,064 votes withheld; 11,186,820 votes in favor of
Alan Thalheimer, with 388,165 votes withheld; 11,186,820 votes in
favor of Gerald Napier, with 388,165 votes withheld; 11,186,520 votes
in favor of Morton David, with 388,465 votes withheld; and 11,186,396
votes in favor of George James, with 388,589 votes withheld.
2. Approval of the Company's 2000 Stock Incentive Plan under
which 3,147,107 shares of Common Stock were initially reserved for
issuance, subject to certain adjustments and increases set forth in
the plan. The result of the voice 5,307,282 votes in favor, 3,259,842
against, 17,047 abstaining, and 2,990,814 broker non-votes.
3. Ratification of selection of Deloitte & Touche LLP as
independent public accountants for the Company for the fiscal year
ending January 31, 2001. The result of the vote was 11,563,066 in
favor, 7,279 against, and 4,640 abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation. (Incorporated by reference to Exhibit 3.1
to Registration Statement on Form S-1 (Registration No. 33-12755).)
3.2 Bylaws. (Incorporated by reference to Exhibit 3.2 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
3.3 Form of Certificate of Designation of Series A Junior participating
Preferred Stock. (Incorporated by reference to Exhibit 3.01 to
Amendment No. 2 to the Registration Statement on Form S-2.)
4.1 Form of Rights Certificate. (Incorporated by reference to Exhibit 4.01
to Amendment No. 2 to the Registration Statement on Form S-2.)
4.2 Form of Rights Agreement dated June 7, 1999. (Incorporated by reference
to Exhibit 4.02 to Amendment No. 2 to the Registration Statement on
Form S-2.)
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10.1 Amended and Restated Stock Option Plan (as amended through September
25, 1998). (Incorporated by reference to Registration Statement on Form
S-8 filed on January 19, 1996 (Registration No. 33-3327) and Exhibit to
Definitive Proxy Statement on Schedule 14A filed April 29, 1999.)
10.2 1994 Non-Employee Director Stock Option Plan dated October 7, 1994 (as
amended through September 25, 1998). (Incorporated by reference to
Registration Statement on Form S-8 filed on January 19, 1996
(Registration No. 33-3327) and Exhibit to Definitive Proxy Statement on
Schedule 14A filed April 29, 1999.)
10.3 Cash or Deferred Profit Sharing Plan, as amended. (Incorporated by
reference to Exhibit 10.2 to Registration Statement on Form S-1
(Registration No. 33-12755).)
10.4 Cash or Deferred Profit Sharing Plan Amendment No. 3. (Incorporated by
reference to Exhibit 10.15 to Form 10-K for fiscal year ended January
31, 1988.)
10.5 Cash or Deferred Profit Sharing Plan Amendment No. 4. (Incorporated by
reference to Exhibit 10.16 to Form 10-K for fiscal year ended January
31, 1988.)
10.6 Form of Stock Purchase Agreement dated July 26, 1985 relating to shares
of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.3 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.7 Form of Stock Purchase Agreement dated December 13, 1985 relating to
shares of Common Stock purchase pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.4 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.8 Form of Stock Purchase Agreement dated November 10, 1986 relating to
shares of Common Stock purchased pursuant to exercise of employee stock
options. (Incorporated by reference to Exhibit 10.5 to Registration
Statement on Form S-1 (Registration No. 33-12755).)
10.9 Form of Director Indemnification Agreement. (Incorporated by reference
to Exhibit 10.42 to Registration Statement on Form S-1 (Registration
No. 33-12755).)
10.10 Financing Agreement dated September 21, 1994 between the Company and
CIT Group/Business Credit Inc. (Incorporated by reference to Exhibit
10.12 to Form 10-Q for the quarter ended October 31, 1994.)
10.11 The Sharper Image 401(K) Savings Plan (Incorporated by reference to
Exhibit 10.21 to Registration Statement of Form S-8 (Registration No.
33-80504) dated June 21, 1994).)
10.12 Chief Executive Officer Compensation Plan dated February 3, 1995.
(Incorporated by reference to Exhibit 10.24 to the Form 10-K for the
fiscal year ended January 31, 1995.)
10.13 Split-Dollar Agreement between the Company and Mr. R. Thalheimer, its
Chief Executive Officer dated October 13, 1995, effective as of May 17,
1995. (Incorporated by reference to Exhibit 10.17 to the Form 10-K for
the fiscal year ended January 31, 1996.)
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10.14 Assignments of Life Insurance Policy as Collateral, both dated October
13, 1995, effective May 17, 1995. (Incorporated by reference to Exhibit
10.18 to the Form 10-K for the fiscal year ended January 31, 1996.)
10.15 Amendment to the Financing Agreement dated May 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.19 to the Form 10Q for the quarter ended April
30, 1996.)
10.16 CAPEX Term Loan Promissory note dated October 15, 1996 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10Q for the quarter ended
October 31, 1996.)
10.17 Amendment to the Financing Agreement dated February 13, 1997 between
the Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.21 to the Form 10-K for the fiscal year ended
January 31, 1997.)
10.18 Amendment to the Financing Agreement dated March 24, 1997 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.23 to the Form 10-K for the fiscal year ended
January 31, 1997.)
10.19 Amendment to the Financing Agreement dated April 6, 1998 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.25 to the Form 10-K for the fiscal year ended
January 31, 1998.)
10.20 Amendment to the Financing Agreement dated March 23, 2000 between the
Company and The CIT Group/Business Credit Inc. (Incorporated by
reference to Exhibit 10.22 to Form 10-K for the fiscal year ended
January 31, 2000.)
10.21 Amendment to the Corporate Headquarters Office Lease Agreement dated
February 9, 2000 between the Company and its landlord, CarrAmerica
Realty Corporation. (Incorporated by reference to Exhibit 20.23 to Form
10-K for the fiscal year ended January 31, 2000.)
10.22 2000 Stock Incentive Plan. (Incorporated by reference to Exhibit to
Definitive Proxy Statement on Schedule 14A filed May 9, 2000.)
10.23 Amendment to the Financing Agreement dated July 18, 2000 between the
Company and The CIT Group/Business Credit, Inc.
15.0 Letter Re: Unaudited Interim Financial Information.
27.0 Financial Data Schedule
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K for the three
months ended July 31, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SHARPER IMAGE CORPORATION
Date: September 14, 2000 by:/s/ Tracy Y. Wan
------------------------------
Tracy Y. Wan
President
Chief Operating Officer
by:/s/ Jeffrey P. Forgan
------------------------------
Jeffrey P. Forgan
Senior Vice President
Chief Financial Officer
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